Super Sunday (1) – It’s Hollande

Francois Hollande, as expected, has won the French presidential election run-off, with 52% of the vote.

In terms of first thoughts, I can’t agree with the Telegraph’s claim that this raises ‘fresh question marks over a eurozone break-up’.

The possibility of increased Franco-German divisions at the euro area’s top table are worrying some people. But the consensus seems to be that Hollande’s ‘renegotiation’ of the fiscal compact to favour growth can be done through compromises that don’t involve having to reopen the text of the treaty.

Indeed, I don’t fundamentally accept the claim that Franco-German divisions are a bad thing for Europe; diverse opinions can be a strength.

I still buy into Mark Leonard’s argument about Europe being a kind of modern-day political Hydra. To quote his example of how disagreements in Western Europe during the 90s led the post-communist countries to so radically reform their economies prior to their EU accession:

British and Nordic enthusiasm for enlargement in the East allowed the countries of Central and Eastern Europe to ‘keep faith’ as they embarked on painful processes of internal reform. At the same time, French doubts allowed the European Commission to exact concessions from them in the protracted negotiations for accession. The key feature of this ‘good cop, bad cop’ dynamic is that, even though the disagreements are genuine, the core objectives of all European countries tend to be the same […]

I think the euro area needs an equivalent dynamic to develop if it’s to convince the peripheral countries to reform their economies without dangerously eroding support for the euro among their voters and politicians – i.e. Hollande’s enthusiasm for growth, Eurobonds, etc, can allow the periphery to ‘keep faith’ in the single currency, at the same term as Merkel’s bailout scepticism extracts concessions from these countries to correct their fiscal imbalances and undertake needed economic reforms.

Are we already doing ‘Plan B’ in the UK?

Following the Q1 GDP data, there were calls from the usual politicians for the UK to switch to an economic ‘Plan B’ in place of the coalition’s planned fiscal consolidation.

Martin Wolf’s latest FT column (£££) makes a more nuanced version of the argument – in essence, that front-loaded fiscal consolidation is not credible during a recession, so pressing ahead will itself lead the market to question whether it’s politically possible to cut the deficit – and is worth a read. But it raises an interesting question for me.

Wolf points out that the government is already on course to miss its original fiscal targets set out after the election, but this hasn’t led the market to question our solvency:

Yet remember that when the chancellor announced his fiscal plans in 2010, net borrowing was supposed to be just £206bn between 2012-13 and 2015-16. In the March 2012 Budget this was up to £317bn. Did that colossal failure to hit his target destroy credibility and so lead to explosive increases in bond yields? No.

Entirely valid. But I would interpret this failure to hit the deficit targets slightly differently.

Remember, in a modern welfare-state economy, much of the fiscal stimulus during a recession comes through ‘automatic stabilisers’ (falling tax revenue, rising spending on unemployment benefits, etc) rather than conscious government actions. These can be important: note that the UK’s fiscal stimulus announced in late 2008 was meant to be a £20bn package, but public sector net borrowing actually increased by more than £80bn between 2008 and 2009, of which about £40bn was down to equity injections into RBS/Lloyds – so half of the non-bailout part of the increase in the 2009 deficit was not due to a conscious decision by the Chancellor.

And it’s these automatic stabilisers, rather than any deliberate relaxation of the government’s fiscal plans, that will have led to the changes in the fiscal projections in the next few years – reflecting the extent to which the economic environment (in the UK and abroad) has deteriorated over the last 6-12 months.

As a result of what we can call this ‘non-deliberate fiscal stimulus’, as Martin Wolf in fact separately points out on his blog, the path of the UK’s fiscal consolidation has actually now switched to something quite close to Alistair Darling’s original pre-election budget proposals:

Therefore, without the need for any deliberate decision by the coalition, can’t one argue that we’re already in the process of switching to a sort of ‘Plan B’ in UK?…